World events move so fast that keeping track of them… even with multiple news screens in front of me nearly 13-hours a day is proving very difficult.

Greece is suddenly no longer front page news. Italy is the new news item as it is the seventh largest world economy and it is in trouble.

From my perspective, Greece needs to now get its new government in place. They are moving to slow and it seems to be upsetting the markets as the marketplace wants to see a new Greek government, one that will accept the austerity measures provided by the EU on October 26^th. If not, I think they will be left to sink as I don’t see the EU willing to do much more for Greece beyond what has been presented. Behind the scenes I’m sure the EU is working with the ECB to get banks to quickly shore up their reserves. If there’s a next “big” news event concerning Greece it will most likely surface after the first of the year when a much larger EU payment, to be made in February, starts being debated. This gives Greece a limited amount of time to implement EU and IMF demands.

The “birds of prey” quickly flew across the continent and are now circling Italy. Italian interest rates today hit all-time Euro era highs today as investors have no confidence in the current government. One way to understand this is to think of how short seller raids take place. The idea behind short selling raids is to find out how far they can push a market. In this case the “raiders” have an ally in existing owners of Italian debt, who are probably scared and dumping what they own. This combination has fueled a “run” on the Italian debt market.

Italy is too both too big to fail and too big to rescue which means Italy must take immediate drastic steps. It must change its government now and implement more austerity measures to calm the markets. If they don’t, the EU may cease to exist in its current form, if it ends up existing at all.

The Eurocurrency plunged today while the Dollar rallied. A strong Dollar can be gold’s enemy and was today. I wish I could tell that gold and the Dollar trade together or in opposite directions. They don’t. It’s a matter of what’s going on and how the market interprets what’s going on at any point in time. 

It’s important to in mind that gold just rallied from $1535 to near $1804. That's a $270 rally in a short period of time. In addition, I as I alluded to on Fox Business News on Monday, I consider even numbers like $1800 to be “natural resistance points”. I define a “natural resistance point” as a number that sounds large and is typically an even number. For example $1900 qualifies as one under my definition. I also have a theory that gold likes to move in $25 increments. Watch how often gold runs into support at $1775, $1750 and so on. Resistance often comes in at $25 points such as $1800, $1825 and so on. It’s very interesting.

Besides Europe, the US has its own mess to worry about. Where’s the Special Committee? What’s it doing about reaching an agreement on budget cuts? I’ve read very little about what they’re doing, but time is quickly running out. I guess this means that as a country we either get a last minute deal shoved down our throats or that the automatic budget cuts just kick in.

Another item to keep on your radar scope has to do with Israel and Iran. Oil prices have recently risen sharply. Today’s break in oil went along with the break today in the stock market and rally in the Dollar, but overall risk premium has in my opinion not come out of the oil market because of the underlying fear that oil flow would be disrupted if Israel attacks Iran. That fear shouldn’t go away if Israel uses the press to signal its unhappiness.

As regular readers of this report know, I have been reporting since the summer on how prices over the past ten years have done from July 31^st to December 31^st, on a closing price basis.

·         2001  + 2.8%

·         2002  + 7.9%

·         2003  + 18.0%

·         2004  + 10.1%

·         2005  + 20.0%

·         2006  + 2.8%

·         2007  + 26.2%

·         2008  -  5.0%

·         2009  + 15.7%

•  2010  + 15.9%     

The price of gold rallied from a low made on September 26^th of $1535 to a high just yesterday of $1804.4. Subscribers to my research were instructed to buy the 1800 Gold Calls on the price break, sell 50% of their position shortly after the purchase and get out of the remainder just yesterday, against the $1800 price level. Needless to say, those who followed my recommendation did well. I wish all the trades worked that well, but they can’t.

A rally from 1621 to 1800 represents an approximate 11% price gain. If you add up  the percentage gains of the previous ten years and divide that number by nine, the number of year that resulted in a gain in the July 31st through December 31^st closing price time frame, you end up with an average gain just over 13%.

Another 2% gain going into a somewhat weak period of time historically speaking in gold didn’t seem worth staying around and was part of the reason I said to get out of the long Gold Calls.

As can be seen on the above chart, in bullish years which I define this year to be, it’s not uncommon for prices to setback in early to mid November only to later gain strength into year end. Therefore, the price break off the $1800 level may end up once again providing traders with an an opportunity to get long on a price correction.

Each individual “green” bar on the above chart represents one day’s trading session. In “red” I have plotted the 18-Day Moving Average of Closing Prices and in “brown” is the Swingline Study. 

Bollinger Bands are displayed as “Black Dashed Lines”.

The Slow Stochastic Study is displayed on the bottom graph between dashed lines between a ratio of 80 and 20.

I’ve used line in the “dark red” to display the close of December Gold on July 31^st on the above chart. Should prices soon fall to that number, I think another play from the bullish side of gold would be warranted. What you don’t want to do is rely on this measure alone, but rather keep in mind that 1621.7 is a key number because that is what the second part of the year’s past percentage gain is based on.

An important near term number that concerns me is is the most recent break low, 1749.8, seen just a few days ago on November 4^th.  I’ve labeled that on the first Daily Chart of December Gold above. As long as that price is not taken out, the Swingline Study remains bullish. Swinglines allow the user of them to measure previous highs and lows in a very distinct manner. Simply explained, Bull Market patterns make higher highs and higher lows. The most recent Swingline Low is 1749.8. Until it is taken out and as long as the Slow Stochastic Study remains embedded, this particular upleg is not over.

As I mentioned above, I correctly timed the use of 1800 Call Options just recently. When possible I recommend taking 50% profit at certain key points if offered and holding onto the remaining position for the longer pull. This obviously takes into consider the risk of loss, which can and does occur as well. In this case, my subscribers took off 50% of their gold with nearly a $10 profit and the rest with a profit of $4.

Today I recommended that subscribers to my research probe the long side of gold by buying against the $1770 level. In part because gold has reached an 11% gain since July 31^st, I don’t recommend using full sized gold contracts. Cut the risk down until more can be told as to whether or not this price correction has further to run. What I don’t want to see is a price break under 1749.8. If that price is broken the current chart pattern will no longer be as bullish as it is.

Let’s assume I’m wrong and prices do break. Than the next level if support becomes the 18-Day Moving Average of Closes, which is currently near $1720. I’m not sure what the chart pattern would look like if that occurs so I can’t yet comment on what I’d recommend in the short term. Frankly, I want prices to hold here and not have to wonder what to do going into year end.

A major warning signal that a correction is about to unfold would be to see the Slow Stochastic reading get the “K” line, the under a reading of 80. It is nowhere near that right now, so I view price corrections as a buying opportunity.

In my Twice Daily Updates, available through subscription you can keep up with my thinking and specific entry, stop and profit objectives.

By clicking here you will be taken to my subscription page or you can go to:

www.iraepstein.com and look on the left hand side of the page for the link.

If you’d like more information about trading gold, simply call us at

1-877-973-2077.

Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc. or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.

-- Posted Thursday, 10 November 2011 | Digg This Article